What is Venture Capitalism

Venture capital

Venture capital is the term used to describe venture or risk capital. This means that the investor waives any hedging on the part of the borrower. The attractiveness of such an investment increases with the respective growth opportunities of the company and the associated returns. Venture capital is often used in the early stages of setting up a company, typically in start-ups.

Similar to business angels, the financial contribution is often accompanied by advisory functions on the part of the financier. Depending on the amount and time of the contribution, as well as the level of knowledge of the borrower, these are designed differently.

Who takes / gives venture capital?

Typically, young, ambitious companies in particular try to finance themselves through venture capital. Such startups usually have very high growth potential, which can be extremely rewarding for an investor. In most cases, a share in the company is assigned to the investor in return. Normally these are percentages between 20-35%. As a result, he becomes a minority shareholder and thus has the right to control and have a say. The entrepreneur is contractually neither obliged to repay the capital nor to pay interest on it. Thus, the investor bears all the risk. If you take into account the failure rate of all startup companies of around 70%, it becomes clear how appropriate the concept of venture capital actually is.

Scope and dynamics of venture capital

The minimum amount of a deposit depends on the venture capital company, but is usually around CHF 10,000. There are no upper limits.

In general, a business start-up is divided into four different phases:

This is where the concept of the business idea is created and the business plan is drawn up. This is often followed by a search for potential investors.

If financing is achieved, the company is effectively founded. At this point in time, the focus is on administrative tasks such as registering in the commercial register or opening bank accounts. It is important to implement the structure and process organization according to the specifications of the business plan.

Now it is important to achieve rapid market penetration and gain market share. To do this, the company has to expand production and sales channels. In this phase, the risk of new entries in the market increases. The aim is to keep the product attractive by expanding the range and to achieve added value compared to the replacement products. Venture capital investments are often made during this phase.

The company was able to establish itself and defend its market share. Positive cash flows are achieved and thus the financing of the initial phases is compensated. This is usually the point in time when investors sell their shares and thus achieve returns. Hence the "exit" phase.

 

Venture capital enables start-ups to get fast and solid financing. The prerequisites for this are, above all, the development of an innovative business idea and the careful development of the business plan. If these tasks are carried out seriously, the financing or the search for investors is also simplified.
Nevertheless, due to the high risks on the part of investors, companies must reckon with sharp criticism and doubts about the business idea.